Property, Plant and Equipment - HKAS 16 Revised JuneAugust 2014 Hong Kong Accounting Standard 16
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HKAS 16
Revised JuneAugust 2014
Hong Kong Accounting Standard 16
Property, Plant and EquipmentHKAS 16 COPYRIGHT © Copyright 2014 Hong Kong Institute of Certified Public Accountants This Hong Kong Financial Reporting Standard contains IFRS Foundation copyright material. Reproduction within Hong Kong in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and inquiries concerning reproduction and rights for commercial purposes within Hong Kong should be addressed to the Director, Finance and Operation, Hong Kong Institute of Certified Public Accountants, 37/F., Wu Chung House, 213 Queen's Road East, Wanchai, Hong Kong. All rights in this material outside of Hong Kong are reserved by IFRS Foundation. Reproduction of Hong Kong Financial Reporting Standards outside of Hong Kong in unaltered form (retaining this notice) is permitted for personal and non-commercial use only. Further information and requests for authorisation to reproduce for commercial purposes outside Hong Kong should be addressed to the IFRS Foundation at www.ifrs.org. Further details of the copyright notice form IFRS foundation is available at http://app1.hkicpa.org.hk/ebook/copyright-notice.pdf © Copyright 2
HKAS 16 (March 2010February 2014)
CONTENTS
HONG KONG ACCOUNTING STANDARD 16
PROPERTY, PLANT AND EQUIPEMENT
from paragraph
INTRODUCTION IN1
OBJECTIVE 1
SCOPE 2
DEFINITIONS 6
RECOGNITION 7
Initial costs 11
Subsequent costs 12
MEASUREMENT AT RECOGNITION 15
Elements of cost 16
Measurement of cost 23
MEASUREMENT AFTER RECOGNITION 29
Cost model 30
Revaluation model 31
Depreciation 43
Depreciable amount and depreciation period 50
Depreciation method 60
Impairment 63
Compensation for impairment 65
DERECOGNITION 67
DISCLOSURE 73
© Copyright 3HKAS 16 (JuneAugust 2014)
TRANSITIONAL PROVISIONS 80
EFFECTIVE DATE 81
WITHDRAWAL OF OTHER PRONOUNCEMENTS 82
APPENDICES:
A Comparison with International Accounting Standards
B Amendments to other pronouncements
C Amendments to HKAS 16 and HKAS 38 Clarification of
Acceptable Methods of Depreciation and Amortisation
D Amendments to HKAS 16 and HKAS 41 Agriculture: Bearer
Plants
BASIS FOR CONCLUSIONS
TABLE OF CONCORDANCE
Hong Kong Accounting Standard 16 Property, Plant and Equipment
(HKAS 16) is set out in paragraphs 1-83 and Appendix B. All the
paragraphs have equal authority. HKAS 16 should be read in the
context of its objective and the Basis for Conclusions, the Preface to
Hong Kong Financial Reporting Standards and the Conceptual
Framework for Financial Reporting. HKAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors provides a basis for
selecting and applying accounting policies in the absence of explicit
guidance.
© Copyright 4HKAS 16 (March 2010)
Introduction
IN1 Hong Kong Accounting Standard 16 Property, Plant and Equipment (HKAS 16) should be
applied for annual periods beginning on or after 1 January 2005. Earlier application is
encouraged.
Reasons for issuing HKAS 16
IN2 The objectives of Hong Kong Institute of Certified Public Accountants (HKICPA) issuing HKAS
16 were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to
deal with some convergence issues and to make other improvements.
IN3 For HKAS 16 the HKICPA’s main objective was a limited revision to provide additional guidance
and clarification on selected matters. The HKICPA did not reconsider the fundamental approach
to the accounting for property, plant and equipment contained in HKAS 16.
The main features
IN4 The main features of HKAS 16 are described below.
Scope
IN5 This Standard clarifies that an entity is required to apply the principles of this Standard to items
of property, plant and equipment used to develop or maintain (a) biological assets and (b)
mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.
Recognition: subsequent costs
IN6 An entity evaluates under the general recognition principle all property, plant and equipment
costs at the time they are incurred. Those costs include costs incurred initially to acquire or
construct an item of property, plant and equipment and costs incurred subsequently to add to,
replace part of, or service an item.
Measurement at recognition: asset dismantlement, removal and
restoration costs
IN7 The cost of an item of property, plant and equipment includes the costs of its dismantlement,
removal or restoration, the obligation for which an entity incurs as a consequence of installing
the item. Its cost also includes the costs of its dismantlement, removal or restoration, the
obligation for which an entity incurs as a consequence of using the item during a particular
period for purposes other than to produce inventories during that period.
Measurement at recognition: asset exchange transactions
IN8 An entity is required to measure an item of property, plant and equipment acquired in exchange
for a non-monetary asset or assets, or a combination of monetary and non-monetary assets, at
fair value unless the exchange transaction lacks commercial substance.
Measurement after recognition: revaluation model
IN9 If fair value can be measured reliably, an entity may carry all items of property, plant and
equipment of a class at a revalued amount, which is the fair value of the items at the date of the
revaluation less any subsequent accumulated depreciation and accumulated impairment
losses.
Depreciation: unit of measure
IN10 An entity is required to determine the depreciation charge separately for each significant part of
an item of property, plant and equipment.
© Copyright 5HKAS 16 (March 2010)
Depreciation: depreciable amount
IN11 An entity is required to measure the residual value of an item of property, plant and equipment
as the amount it estimates it would receive currently for the asset if the asset were already of the
age and in the condition expected at the end of its useful life.
Depreciation: depreciation period
IN12 An entity is required to begin depreciating an item of property, plant and equipment when it is
available for use and to continue depreciating it until it is derecognised, even if during that
period the item is idle.
Derecognition: derecognition date
IN13 An entity is required to derecognise the carrying amount of an item of property, plant and
equipment that it disposes of on the date the criteria for the sale of goods in HKAS 18 Revenue
would be met.
IN14 An entity is required to derecognise the carrying amount of a part of an item of property, plant
and equipment if that part has been replaced and the entity has included the cost of the
replacement in the carrying amount of the item.
Derecognition: gain classification
IN15 An entity cannot classify as revenue a gain it realises on the disposal of an item of property,
plant and equipment.
© Copyright 6HKAS 16 (March 2010)
Hong Kong Accounting Standard 16
Property, Plant and Equipment
Objective
1 The objective of this Standard is to prescribe the accounting treatment for property, plant and
equipment so that users of the financial statements can discern information about an entity’s
investment in its property, plant and equipment and the changes in such investment. The
principal issues in accounting for property, plant and equipment are the recognition of the assets,
the determination of their carrying amounts and the depreciation charges and impairment losses
to be recognised in relation to them.
Scope
2 This Standard shall be applied in accounting for property, plant and equipment except
when another Standard requires or permits a different accounting treatment.
3 This Standard does not apply to:
(a) property, plant and equipment classified as held for sale in accordance with HKFRS 5
Non-current Assets Held for Sale and Discontinued Operations;
(b) biological assets related to agricultural activity (see HKAS 41 Agriculture);
(c) the recognition and measurement of exploration and evaluation assets (see HKFRS 6
Exploration for and Evaluation of Mineral Resources); or
(d) mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources.
However, this Standard applies to property, plant and equipment used to develop or maintain
the assets described in (b) - (d).
4 Other Standards may require recognition of an item of property, plant and equipment based on
an approach different from that in this Standard. For example, HKAS 17 Leases requires an
entity to evaluate its recognition of an item of leased property, plant and equipment on the basis
of the transfer of risks and rewards. However, in such cases other aspects of the accounting
treatment for these assets, including depreciation, are prescribed by this Standard.
5 An entity using the cost model for investment property in accordance with HKAS 40 Investment
Property shall use the cost model in this Standard.
Definitions
6 The following terms are used in this Standard with the meanings specified:
Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.
Cost is the amount of cash or cash equivalents paid or the fair value of other
consideration given to acquire an asset at the time of its acquisition or construction or,
where applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other HKFRSs, e.g. HKFRS 2 Share-based
Payment.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its
residual value.
Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life.
© Copyright 7HKAS 16 (March 2010February 2014)
Entity-specific value is the present value of the cash flows an entity expects to arise from
the continuing use of an asset and from its disposal at the end of its useful life or expects
to incur when settling a liability.
Fair value is the amount for which an asset could be exchanged between knowledgeable,
willing parties in an arm’s length transactionis the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. (See HKFRS 13 Fair Value Measurement).
An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in
use.
The residual value of an asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, if the
asset were already of the age and in the condition expected at the end of its useful life.
Useful life is:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset
by an entity.
Recognition
7 The cost of an item of property, plant and equipment shall be recognised as an asset if,
and only if:
(a) it is probable that future economic benefits associated with the item will flow to
the entity; and
(b) the cost of the item can be measured reliably.
8. SpareItems such as spare parts, stand-by equipment and servicing equipment are recognised
in accordance with this HKFRSare usually carried as inventory and recognised in profit or loss
as consumed. However, major spare parts and stand-by equipment qualify as property, plant
and equipment when they meet the definition of property, plant and equipment. Otherwise, such
items are classified as inventory.an entity expects to use them during more than one period.
Similarly, if the spare parts and servicing equipment can be used only in connection with an item
of property, plant and equipment, they are accounted for as property, plant and equipment.
9 This Standard does not prescribe the unit of measure for recognition, ie what constitutes an item
of property, plant and equipment. Thus, judgement is required in applying the recognition
criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually
insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate
value.
10 An entity evaluates under this recognition principle all its property, plant and equipment costs at
the time they are incurred. These costs include costs incurred initially to acquire or construct an
item of property, plant and equipment and costs incurred subsequently to add to, replace part of,
or service it.
© Copyright 8HKAS 16 (March 2004)
Initial costs
11 Items of property, plant and equipment may be acquired for safety or environmental reasons.
The acquisition of such property, plant and equipment, although not directly increasing the
future economic benefits of any particular existing item of property, plant and equipment, may
be necessary for an entity to obtain the future economic benefits from its other assets. Such
items of property, plant and equipment qualify for recognition as assets because they enable an
entity to derive future economic benefits from related assets in excess of what could be derived
had those items not been acquired. For example, a chemical manufacturer may install new
chemical handling processes to comply with environmental requirements for the production and
storage of dangerous chemicals; related plant enhancements are recognised as an asset
because without them the entity is unable to manufacture and sell chemicals. However, the
resulting carrying amount of such an asset and related assets is reviewed for impairment in
accordance with HKAS 36 Impairment of Assets.
Subsequent costs
12 Under the recognition principle in paragraph 7, an entity does not recognise in the carrying
amount of an item of property, plant and equipment the costs of the day-to-day servicing of the
item. Rather, these costs are recognised in profit or loss as incurred. Costs of day-to-day
servicing are primarily the costs of labour and consumables, and may include the cost of small
parts. The purpose of these expenditures is often described as for the ‘repairs and maintenance’
of the item of property, plant and equipment.
13 Parts of some items of property, plant and equipment may require replacement at regular
intervals. For example, a furnace may require relining after a specified number of hours of use,
or aircraft interiors such as seats and galleys may require replacement several times during the
life of the airframe. Items of property, plant and equipment may also be acquired to make a less
frequently recurring replacement, such as replacing the interior walls of a building, or to make a
non-recurring replacement. Under the recognition principle in paragraph 7, an entity recognises
in the carrying amount of an item of property, plant and equipment the cost of replacing part of
such an item when that cost is incurred if the recognition criteria are met. The carrying amount
of those parts that are replaced is derecognised in accordance with the derecognition provisions
of this Standard (see paragraphs 67-72).
14 A condition of continuing to operate an item of property, plant and equipment (for example, an
aircraft) may be performing regular major inspections for faults regardless of whether parts of
the item are replaced. When each major inspection is performed, its cost is recognised in the
carrying amount of the item of property, plant and equipment as a replacement if the recognition
criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection (as
distinct from physical parts) is derecognised. This occurs regardless of whether the cost of the
previous inspection was identified in the transaction in which the item was acquired or
constructed. If necessary, the estimated cost of a future similar inspection may be used as an
indication of what the cost of the existing inspection component was when the item was
acquired or constructed.
Measurement at recognition
15 An item of property, plant and equipment that qualifies for recognition as an asset shall
be measured at its cost.
Elements of cost
16 The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates;
(b) any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling and removing the item and restoring the
site on which it is located, the obligation for which an entity incurs either when the item
is acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.
© Copyright 9HKAS 16 (March 2010)
17 Examples of directly attributable costs are:
(a) costs of employee benefits (as defined in HKAS 19 Employee Benefits) arising directly
from the construction or acquisition of the item of property, plant and equipment;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location and
condition (such as samples produced when testing equipment); and
(f) professional fees.
18 An entity applies HKAS 2 Inventories to the costs of obligations for dismantling, removing and
restoring the site on which an item is located that are incurred during a particular period as a
consequence of having used the item to produce inventories during that period. The obligations
for costs accounted for in accordance with HKAS 2 or HKAS 16 are recognised and measured
in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets.
19 Examples of costs that are not costs of an item of property, plant and equipment are:
(a) costs of opening a new facility;
(b) costs of introducing a new product or service (including costs of advertising and
promotional activities);
(c) costs of conducting business in a new location or with a new class of customer
(including costs of staff training); and
(d) administration and other general overhead costs.
20 Recognition of costs in the carrying amount of an item of property, plant and equipment ceases
when the item is in the location and condition necessary for it to be capable of operating in the
manner intended by management. Therefore, costs incurred in using or redeploying an item are
not included in the carrying amount of that item. For example, the following costs are not
included in the carrying amount of an item of property, plant and equipment:
(a) costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity;
(b) initial operating losses, such as those incurred while demand for the item’s output
builds up; and
(c) costs of relocating or reorganising part or all of an entity’s operations.
21 Some operations occur in connection with the construction or development of an item of
property, plant and equipment, but are not necessary to bring the item to the location and
condition necessary for it to be capable of operating in the manner intended by management.
These incidental operations may occur before or during the construction or development
activities. For example, income may be earned through using a building site as a car park until
construction starts. Because incidental operations are not necessary to bring an item to the
location and condition necessary for it to be capable of operating in the manner intended by
management, the income and related expenses of incidental operations are recognised in profit
or loss and included in their respective classifications of income and expense.
© Copyright 10HKAS 16 (March 2010February 2014)
22 The cost of a self-constructed asset is determined using the same principles as for an acquired
asset. If an entity makes similar assets for sale in the normal course of business, the cost of the
asset is usually the same as the cost of constructing an asset for sale (see HKAS 2). Therefore,
any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal
amounts of wasted material, labour, or other resources incurred in self-constructing an asset is
not included in the cost of the asset. HKAS 23 Borrowing Costs establishes criteria for the
recognition of interest as a component of the carrying amount of a self-constructed item of
property, plant and equipment.
Measurement of cost
23 The cost of an item of property, plant and equipment is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the difference between the
cash price equivalent and the total payment is recognised as interest over the period of credit
unless such interest is capitalised in accordance with HKAS 23.
24 One or more items of property, plant and equipment may be acquired in exchange for a
non-monetary asset or assets, or a combination of monetary and non-monetary assets. The
following discussion refers simply to an exchange of one non-monetary asset for another, but it
also applies to all exchanges described in the preceding sentence. The cost of such an item of
property, plant and equipment is measured at fair value unless (a) the exchange transaction
lacks commercial substance or (b) the fair value of neither the asset received nor the asset
given up is reliably measurable. The acquired item is measured in this way even if an entity
cannot immediately derecognise the asset given up. If the acquired item is not measured at fair
value, its cost is measured at the carrying amount of the asset given up.
25 An entity determines whether an exchange transaction has commercial substance by
considering the extent to which its future cash flows are expected to change as a result of the
transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received
differs from the configuration of the cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the entity’s operations affected by the
transaction changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets
exchanged.
For the purpose of determining whether an exchange transaction has commercial substance,
the entity-specific value of the portion of the entity’s operations affected by the transaction shall
reflect post-tax cash flows. The result of these analyses may be clear without an entity having to
perform detailed calculations.
26 The fair value of an asset for which comparable market transactions do not exist is reliably
measurable if (a) the variability in the range of reasonable fair value estimates measurements is
not significant for that asset or (b) the probabilities of the various estimates within the range can
be reasonably assessed and used in estimatingwhen measuring fair value. If an entity is able to
determinemeasure reliably the fair value of either the asset received or the asset given up, then
the fair value of the asset given up is used to measure the cost of the asset received unless the
fair value of the asset received is more clearly evident.
27 The cost of an item of property, plant and equipment held by a lessee under a finance lease is
determined in accordance with HKAS 17.
28 The carrying amount of an item of property, plant and equipment may be reduced by
government grants in accordance with HKAS 20 Accounting for Government Grants and
Disclosure of Government Assistance.
© Copyright 11HKAS 16 (March 2010February 2014)
Measurement after recognition
29 An entity shall choose either the cost model in paragraph 30 or the revaluation model in
paragraph 31 as its accounting policy and shall apply that policy to an entire class of
property, plant and equipment.
Cost model
30 After recognition as an asset, an item of property, plant and equipment shall be carried at
its cost less any accumulated depreciation and any accumulated impairment losses.
Revaluation model
31 After recognition as an asset, an item of property, plant and equipment whose fair value
can be measured reliably shall be carried at a revalued amount, being its fair value at the
date of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations shall be made with sufficient regularity to
ensure that the carrying amount does not differ materially from that which would be
determined using fair value at the end of the reporting period.
32 [Deleted]The fair value of land and buildings is usually determined from market-based evidence
by appraisal that is normally undertaken by professionally qualified valuers. The fair value of
items of plant and equipment is usually their market value determined by appraisal.
33 [Deleted]If there is no market-based evidence of fair value because of the specialised nature of
the item of property, plant and equipment and the item is rarely sold, except as part of a
continuing business, an entity may need to estimate fair value using an income or a depreciated
replacement cost approach.
34 The frequency of revaluations depends upon the changes in fair values of the items of property,
plant and equipment being revalued. When the fair value of a revalued asset differs materially
from its carrying amount, a further revaluation is required. Some items of property, plant and
equipment experience significant and volatile changes in fair value, thus necessitating annual
revaluation. Such frequent revaluations are unnecessary for items of property, plant and
equipment with only insignificant changes in fair value. Instead, it may be necessary to revalue
the item only every three or five years.
35 When an item of property, plant and equipment is revalued, any accumulated depreciation at
the date of the revaluation is treated in one of the following ways:
(a) restated proportionately with the change in the gross carrying amount of the asset so
that the carrying amount of the asset after revaluation equals its revalued amount. This
method is often used when an asset is revalued by means of applying an index to
determine its depreciated replacement cost (see HKFRS13).
(b) eliminated against the gross carrying amount of the asset and the net amount restated
to the revalued amount of the asset. This method is often used for buildings.
The amount of the adjustment arising on the restatement or elimination of accumulated
depreciation forms part of the increase or decrease in carrying amount that is accounted for in
accordance with paragraphs 39 and 40.
36 If an item of property, plant and equipment is revalued, the entire class of property, plant
and equipment to which that asset belongs shall be revalued.
37 A class of property, plant and equipment is a grouping of assets of a similar nature and use in
an entity’s operations. The following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
© Copyright 12HKAS 16 (March 2010)
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures; and
(h) office equipment.
38 The items within a class of property, plant and equipment are revalued simultaneously to avoid
selective revaluation of assets and the reporting of amounts in the financial statements that are
a mixture of costs and values as at different dates. However, a class of assets may be revalued
on a rolling basis provided revaluation of the class of assets is completed within a short period
and provided the revaluations are kept up to date.
39 If an asset’s carrying amount is increased as a result of a revaluation, the increase shall
be recognised in other comprehensive income and accumulated in equity under the
heading of revaluation surplus. However, the increase shall be recognised in profit or
loss to the extent that it reverses a revaluation decrease of the same asset previously
recognised in profit or loss.
40 If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall
be recognised in profit or loss. However, the decrease shall be recognised in other
comprehensive income to the extent of any credit balance existing in the revaluation
surplus in respect of that asset. The decrease recognised in other comprehensive
income reduces the amount accumulated in equity under the heading of revaluation
surplus.
41 The revaluation surplus included in equity in respect of an item of property, plant and equipment
may be transferred directly to retained earnings when the asset is derecognised. This may
involve transferring the whole of the surplus when the asset is retired or disposed of. However,
some of the surplus may be transferred as the asset is used by an entity. In such a case, the
amount of the surplus transferred would be the difference between depreciation based on the
revalued carrying amount of the asset and depreciation based on the asset’s original cost.
Transfers from revaluation surplus to retained earnings are not made through profit or loss.
42 The effects of taxes on income, if any, resulting from the revaluation of property, plant and
equipment are recognised and disclosed in accordance with HKAS 12 Income Taxes.
Depreciation
43 Each part of an item of property, plant and equipment with a cost that is significant in
relation to the total cost of the item shall be depreciated separately.
44 An entity allocates the amount initially recognised in respect of an item of property, plant and
equipment to its significant parts and depreciates separately each such part. For example, it
may be appropriate to depreciate separately the airframe and engines of an aircraft, whether
owned or subject to a finance lease. Similarly, if an entity acquires property, plant and
equipment subject to an operating lease in which it is the lessor, it may be appropriate to
depreciate separately amounts reflected in the cost of that item that are attributable to
favourable or unfavourable lease terms relative to market terms.
45 A significant part of an item of property, plant and equipment may have a useful life and a
depreciation method that are the same as the useful life and the depreciation method of another
significant part of that same item. Such parts may be grouped in determining the depreciation
charge.
46 To the extent that an entity depreciates separately some parts of an item of property, plant and
equipment, it also depreciates separately the remainder of the item. The remainder consists of
the parts of the item that are individually not significant. If an entity has varying expectations for
these parts, approximation techniques may be necessary to depreciate the remainder in a
manner that faithfully represents the consumption pattern and/or useful life of its parts.
© Copyright 13HKAS 16 (March 2004)
47 An entity may choose to depreciate separately the parts of an item that do not have a cost that
is significant in relation to the total cost of the item.
48 The depreciation charge for each period shall be recognised in profit or loss unless it is
included in the carrying amount of another asset.
49 The depreciation charge for a period is usually recognised in profit or loss. However, sometimes,
the future economic benefits embodied in an asset are absorbed in producing other assets. In
this case, the depreciation charge constitutes part of the cost of the other asset and is included
in its carrying amount. For example, the depreciation of manufacturing plant and equipment is
included in the costs of conversion of inventories (see HKAS 2). Similarly, depreciation of
property, plant and equipment used for development activities may be included in the cost of an
intangible asset recognised in accordance with HKAS 38 Intangible Assets.
Depreciable amount and depreciation period
50 The depreciable amount of an asset shall be allocated on a systematic basis over its
useful life.
51 The residual value and the useful life of an asset shall be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, the change(s) shall
be accounted for as a change in an accounting estimate in accordance with HKAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
52 Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as
long as the asset’s residual value does not exceed its carrying amount. Repair and maintenance
of an asset do not negate the need to depreciate it.
53 The depreciable amount of an asset is determined after deducting its residual value. In practice,
the residual value of an asset is often insignificant and therefore immaterial in the calculation of
the depreciable amount.
54 The residual value of an asset may increase to an amount equal to or greater than the asset’s
carrying amount. If it does, the asset’s depreciation charge is zero unless and until its residual
value subsequently decreases to an amount below the asset’s carrying amount.
55 Depreciation of an asset begins when it is available for use, ie when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.
Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for
sale (or included in a disposal group that is classified as held for sale) in accordance with
HKFRS 5 and the date that the asset is derecognised. Therefore, depreciation does not cease
when the asset becomes idle or is retired from active use unless the asset is fully depreciated.
However, under usage methods of depreciation the depreciation charge can be zero while there
is no production.
56 The future economic benefits embodied in an asset are consumed by an entity principally
through its use. However, other factors, such as technical or commercial obsolescence and
wear and tear while an asset remains idle, often result in the diminution of the economic benefits
that might have been obtained from the asset. Consequently, all the following factors are
considered in determining the useful life of an asset:
(a) expected usage of the asset. Usage is assessed by reference to the asset’s expected
capacity or physical output.
(b) expected physical wear and tear, which depends on operational factors such as the
number of shifts for which the asset is to be used and the repair and maintenance
programme, and the care and maintenance of the asset while idle.
(c) technical or commercial obsolescence arising from changes or improvements in
production, or from a change in the market demand for the product or service output of
the asset.
(d) legal or similar limits on the use of the asset, such as the expiry dates of related leases.
© Copyright 14HKAS 16 (December 2007)
57 The useful life of an asset is defined in terms of the asset’s expected utility to the entity. The
asset management policy of the entity may involve the disposal of assets after a specified time
or after consumption of a specified proportion of the future economic benefits embodied in the
asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimation
of the useful life of the asset is a matter of judgement based on the experience of the entity with
similar assets.
58 Land and buildings are separable assets and are accounted for separately, even when they are
acquired together. With some exceptions, such as quarries and sites used for landfill, land has
an unlimited useful life and therefore is not depreciated. Buildings have a limited useful life and
therefore are depreciable assets. An increase in the value of the land on which a building stands
does not affect the determination of the depreciable amount of the building.
59 If the cost of land includes the costs of site dismantlement, removal and restoration, that portion
of the land asset is depreciated over the period of benefits obtained by incurring those costs. In
some cases, the land itself may have a limited useful life, in which case it is depreciated in a
manner that reflects the benefits to be derived from it.
Depreciation method
60 The depreciation method used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.
61 The depreciation method applied to an asset shall be reviewed at least at each financial
year-end and, if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the method shall be
changed to reflect the changed pattern. Such a change shall be accounted for as a
change in an accounting estimate in accordance with HKAS 8.
62 A variety of depreciation methods can be used to allocate the depreciable amount of an asset
on a systematic basis over its useful life. These methods include the straight-line method, the
diminishing balance method and the units of production method. Straight-line depreciation
results in a constant charge over the useful life if the asset’s residual value does not change.
The diminishing balance method results in a decreasing charge over the useful life. The units of
production method results in a charge based on the expected use or output. The entity selects
the method that most closely reflects the expected pattern of consumption of the future
economic benefits embodied in the asset. That method is applied consistently from period to
period unless there is a change in the expected pattern of consumption of those future
economic benefits.
Impairment
63 To determine whether an item of property, plant and equipment is impaired, an entity applies
HKAS 36 Impairment of Assets. That Standard explains how an entity reviews the carrying
amount of its assets, how it determines the recoverable amount of an asset, and when it
recognises, or reverses the recognition of, an impairment loss.
64 [Deleted]
Compensation for impairment
65 Compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up shall be included in profit or loss when the compensation
becomes receivable.
66. Impairments or losses of items of property, plant and equipment, related claims for or payments
of compensation from third parties and any subsequent purchase or construction of
replacement assets are separate economic events and are accounted for separately as follows:
(a) impairments of items of property, plant and equipment are recognised in accordance
with HKAS 36;
(b) derecognition of items of property, plant and equipment retired or disposed of is
determined in accordance with this Standard;
(c) compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up is included in determining profit or loss when it becomes
receivable; and
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(d) the cost of items of property, plant and equipment restored, purchased or constructed
as replacements is determined in accordance with this Standard.
Derecognition
67 The carrying amount of an item of property, plant and equipment shall be derecognised:
(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.
68 The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be included in profit or loss when the item is derecognised (unless
HKAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as
revenue.
68A However, an entity that, in the course of its ordinary activities, routinely sells items of property,
plant and equipment that it has held for rental to others shall transfer such assets to inventories
at their carrying amount when they cease to be rented and become held for sale. The proceeds
from the sale of such assets shall be recognised as revenue in accordance with HKAS 18
Revenue. HKFRS 5 does not apply when assets that are held for sale in the ordinary course of
business are transferred to inventories.
69 The disposal of an item of property, plant and equipment may occur in a variety of ways (eg by
sale, by entering into a finance lease or by donation). In determining the date of disposal of an
item, an entity applies the criteria in HKAS 18 for recognising revenue from the sale of goods.
HKAS 17 applies to disposal by a sale and leaseback.
70 If, under the recognition principle in paragraph 7, an entity recognises in the carrying amount of
an item of property, plant and equipment the cost of a replacement for part of the item, then it
derecognises the carrying amount of the replaced part regardless of whether the replaced part
had been depreciated separately. If it is not practicable for an entity to determine the carrying
amount of the replaced part, it may use the cost of the replacement as an indication of what the
cost of the replaced part was at the time it was acquired or constructed.
71 The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal proceeds, if
any, and the carrying amount of the item.
72 The consideration receivable on disposal of an item of property, plant and equipment is
recognised initially at its fair value. If payment for the item is deferred, the consideration
received is recognised initially at the cash price equivalent. The difference between the nominal
amount of the consideration and the cash price equivalent is recognised as interest revenue in
accordance with HKAS 18 reflecting the effective yield on the receivable.
Disclosure
73 The financial statements shall disclose, for each class of property, plant and equipment:
(a) the measurement bases used for determining the gross carrying amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period; and
(e) a reconciliation of the carrying amount at the beginning and end of the period
showing:
(i) additions;
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(ii) assets classified as held for sale or included in a disposal group
classified as held for sale in accordance with HKFRS 5 and other
disposals;
(iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations under paragraphs
31, 39 and 40 and from impairment losses recognised or reversed in
other comprehensive income in accordance with HKAS 36;
(v) impairment losses recognised in profit or loss in accordance with HKAS
36;
(vi) impairment losses reversed in profit or loss in accordance with HKAS
36;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the financial
statements from the functional currency into a different presentation
currency, including the translation of a foreign operation into the
presentation currency of the reporting entity; and
(ix) other changes.
74 The financial statements shall also disclose:
(a) the existence and amounts of restrictions on title, and property, plant and
equipment pledged as security for liabilities;
(b) the amount of expenditures recognised in the carrying amount of an item of
property, plant and equipment in the course of its construction;
(c) the amount of contractual commitments for the acquisition of property, plant
and equipment; and
(d) if it is not disclosed separately in the statement of comprehensive income, the
amount of compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up that is included in profit or loss.
75 Selection of the depreciation method and estimation of the useful life of assets are matters of
judgement. Therefore, disclosure of the methods adopted and the estimated useful lives or
depreciation rates provides users of financial statements with information that allows them to
review the policies selected by management and enables comparisons to be made with other
entities. For similar reasons, it is necessary to disclose:
(a) depreciation, whether recognised in profit or loss or as a part of the cost of other assets,
during a period; and
(b) accumulated depreciation at the end of the period.
76 In accordance with HKAS 8 an entity discloses the nature and effect of a change in an
accounting estimate that has an effect in the current period or is expected to have an effect in
subsequent periods. For property, plant and equipment, such disclosure may arise from
changes in estimates with respect to:
(a) residual values;
(b) the estimated costs of dismantling, removing or restoring items of property, plant and
equipment;
(c) useful lives; and
(d) depreciation methods.
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77 If items of property, plant and equipment are stated at revalued amounts, the following
shall be disclosed in addition to the disclosures required by HKFRS 13:
(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) [deleted]the methods and significant assumptions applied in estimating the
items’ fair values;
(d) [deleted]the extent to which the items’ fair values were determined directly by
reference to observable prices in an active market or recent market transactions
on arm’s length terms or were estimated using other valuation techniques;
(e) for each revalued class of property, plant and equipment, the carrying amount
that would have been recognised had the assets been carried under the cost
model; and
(f) the revaluation surplus, indicating the change for the period and any restrictions
on the distribution of the balance to shareholders.
78 In accordance with HKAS 36 an entity discloses information on impaired property, plant and
equipment in addition to the information required by paragraph 73(e)(iv)-(vi).
79 Users of financial statements may also find the following information relevant to their needs:
(a) the carrying amount of temporarily idle property, plant and equipment;
(b) the gross carrying amount of any fully depreciated property, plant and equipment that
is still in use;
(c) the carrying amount of property, plant and equipment retired from active use and not
classified as held for sale in accordance with HKFRS 5; and
(d) when the cost model is used, the fair value of property, plant and equipment when this
is materially different from the carrying amount.
Therefore, entities are encouraged to disclose these amounts.
Transitional provisions
80 The requirements of paragraphs 24-26 regarding the initial measurement of an item of
property, plant and equipment acquired in an exchange of assets transaction shall be
applied prospectively only to future transactions.
80A Enterprises which carried property, plant and equipment at revalued amounts in financial
statements relating to periods ended before 30 September 1995 are not required to make
regular revaluations in accordance with paragraphs 31 and 36 even if the carrying
amounts of the revalued assets are materially different from the asset’s fair values
provided that:
(a) these enterprises do not revalue their property, plant and equipment subsequent
to 1995; and
(b) disclosure of reliance of this paragraph is made in the financial statements.
80B SSAP 17 Property, Plant and Equipment exempted charitable, government subvented
and not-for-profit organisations whose long-term financial objective is other than to
achieve operating profits (e.g. trade associations, clubs and retirement schemes) from
compliance with its requirements. Those entities that have previously taken advantage of
the exemption under SSAP 17 are permitted to deem the carrying amount of an item of
property, plant and equipment immediately before applying this Standard on its effective
date (or earlier) as the cost of that item. Depreciation on the deemed cost of an item of
property, plant and equipment commences from the time at which this Standard is first
applied. In the case where a carrying amount is used as a deemed cost for subsequent
accounting, this fact and the aggregate of the carrying amounts for each class of
property, plant and equipment presented shall be disclosed.
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Effective date
81 An entity shall apply this Standard for annual periods beginning on or after 1 January
2005. Earlier application is encouraged. If an entity applies this Standard for a period
beginning before 1 January 2005, it shall disclose that fact.
81a If an entity decides to apply this Standard for an earlier period, it is not required to apply all the
HKASs with the effective date for that same period. However, it is required to apply the
amendments set out in the appendix on amendments to other pronouncements for that earlier
period(s).
81A An entity shall apply the amendments in paragraph 3 for annual periods beginning on or after 1
January 2006. If an entity applies HKFRS 6 for an earlier period, those amendments shall be
applied for that earlier period.
81B HKAS 1 Presentation of Financial Statements (as revised in 2007) amended the terminology
used throughout HKFRSs. In addition it amended paragraphs 39, 40 and 73(e)(iv). An entity
shall apply those amendments for annual periods beginning on or after 1 January 2009. If an
entity applies HKAS 1 (revised 2007) for an earlier period, the amendments shall be applied for
that earlier period.
81C HKFRS 3 Business Combinations (as revised in 2008) amended paragraph 44. An entity shall
apply that amendment for annual periods beginning on or after 1 July 2009. If an entity applies
HKFRS 3 (revised 2008) for an earlier period, the amendment shall also be applied for that
earlier period.
81D Paragraphs 6 and 69 were amended and paragraph 68A was added by Improvements to
HKFRSs issued in October 2008. An entity shall apply those amendments for annual periods
beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the
amendments for an earlier period it shall disclose that fact and at the same time apply the
related amendments to HKAS 7 Statement of Cash Flows.
81E Paragraph 5 was amended by Improvements to HKFRSs issued in October 2008. An entity shall
apply that amendment prospectively for annual periods beginning on or after 1 January 2009.
Earlier application is permitted if an entity also applies the amendments to paragraphs 8, 9, 22,
48, 53, 53A, 53B, 54, 57 and 85B of HKAS 40 at the same time. If an entity applies the
amendment for an earlier period it shall disclose that fact.
81F HKFRS 13, issued in June 2011, amended the definition of fair value in paragraph 6, amended
paragraphs 26, 35 and 77 and deleted paragraphs 32 and 33. An entity shall apply those
amendments when it applies HKFRS 13.
81G Annual Improvements 2009-2011 Cycle, issued in June 2012, amended paragraph 8. An entity
shall apply that amendment retrospectively in accordance with HKAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors for annual periods beginning on or after 1 January
2013. Earlier application is permitted. If an entity applies that amendment for an earlier period it
shall disclose that fact.
Withdrawal of other pronouncements
82 This Standard supersedes SSAP 17 Property, Plant and Equipment revised in 2001.
83 This Standard supersedes the following Interpretations: (a) Interpretation 1 Costs of Modifying
Existing Software and Interpretation 5 Property, Plant and Equipment—Compensation for the
Impairment or Loss of Items
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Appendix A
Comparison with International Accounting Standards
This comparison appendix, which was prepared as at 24 November 2005 and deals only with significant
differences in the standards extant, is produced for information only and does not form part of the
standards in HKAS 16.
The International Accounting Standard comparable with HKAS 16 is IAS 16 Property, Plant and
Equipment.
The following sets out the major textual difference between HKAS 16 and IAS 16 and the reason for the
difference.
Difference Reason for the difference
(i) HKAS 16 para 80A
A transitional arrangement was introduced in To carry forward the transitional arrangement
the original SSAP 17 issued in 1995 to previously included in SSAP 17.
relieve certain enterprises which carried their
property, plant and equipment at revalued
amounts before 30 September 1995 from
making regular revaluations.
(ii) HKAS 16 para 80B
A transitional arrangement is included to To deal with the concern of those exempted
allow those entities that have previously entities that it might not be possible for them to
taken advantage of the exemption under trace back the original cost of the asset for
SSAP 17 Property, Plant and Equipment to applying this Standard.
deem the carrying amount of an item of
property, plant and equipment immediately
before applying this Standard on its effective
date (or earlier) as the cost of that item.
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Appendix B
Amendments to other pronouncements
The amendments in this appendix shall be applied for annual periods beginning on or after 1 January
2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that
earlier period.
***
The amendments contained in this appendix when this Standard was issued have been incorporated into
the relevant Standards.
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Appendix C
Amendments to HKAS 16 Clarification of Acceptable Methods
of Depreciation and Amortisation
The following sets out amendments required for this Standard resulting from amendments to
HKAS 16 that are not yet effective. Once effective, the amendments set out below will be
incorporated into the text of this Standard and this appendix will be deleted. In the amended
paragraphs shown below, new text is underlined and deleted text is struck through.
Paragraph 56 is amended and paragraphs 62A and 81I are added. Paragraphs 60–62 are not
amended but are included here for ease of reference. New text is underlined.
Depreciable amount and depreciation period
…
56 The future economic benefits embodied in an asset are consumed by an entity
principally through its use. However, other factors, such as technical or commercial
obsolescence and wear and tear while an asset remains idle, often result in the
diminution of the economic benefits that might have been obtained from the asset.
Consequently, all the following factors are considered in determining the useful life of
an asset:
(a) …
(c) technical or commercial obsolescence arising from changes or
improvements in production, or from a change in the market demand for the
product or service output of the asset. Expected future reductions in the
selling price of an item that was produced using an asset could indicate the
expectation of technical or commercial obsolescence of the asset, which, in
turn, might reflect a reduction of the future economic benefits embodied in
the asset.
…
Depreciation method
60 The depreciation method used shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity.
61 The depreciation method applied to an asset shall be reviewed at least at each
financial year-end and, if there has been a significant change in the expected
pattern of consumption of the future economic benefits embodied in the asset,
the method shall be changed to reflect the changed pattern. Such a change
shall be accounted for as a change in an accounting estimate in accordance
with HKAS 8.
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62 A variety of depreciation methods can be used to allocate the depreciable amount of
an asset on a systematic basis over its useful life. These methods include the
straight-line method, the diminishing balance method and the units of production
method. Straight-line depreciation results in a constant charge over the useful life if
the asset’s residual value does not change. The diminishing balance method results
in a decreasing charge over the useful life. The units of production method results in a
charge based on the expected use or output. The entity selects the method that most
closely reflects the expected pattern of consumption of the future economic benefits
embodied in the asset. That method is applied consistently from period to period
unless there is a change in the expected pattern of consumption of those future
economic benefits.
62A A depreciation method that is based on revenue that is generated by an activity that
includes the use of an asset is not appropriate. The revenue generated by an activity
that includes the use of an asset generally reflects factors other than the consumption
of the economic benefits of the asset. For example, revenue is affected by other
inputs and processes, selling activities and changes in sales volumes and prices. The
price component of revenue may be affected by inflation, which has no bearing upon
the way in which an asset is consumed.
...
Effective date
…
81I Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments
to HKAS 16 and HKAS 38), issued in June 2014, amended paragraph 56 and added
paragraph 62A. An entity shall apply those amendments prospectively for annual
periods beginning on or after 1 January 2016. Earlier application is permitted. If an
entity applies those amendments for an earlier period it shall disclose that fact.
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